PRINCIPLES OF LENDING

& CREDIT POLICY

Principles of Lending
Banking is both an art and a science, guided by general principles
rather than rigid rules. A banker must adapt to changing
circumstances, applying skill and diligence to ensure sound lending
decisions. The safety of funds is paramount, as bankers disburse
depositors' money and must exercise caution and prudence to
protect it.

Identifying the borrower’s character, integrity, and business

acumen is essential. Banks must adhere to KYC norms and
continuously update borrower information. Lending should be
purpose-driven, socially and economically desirable, avoiding
speculative or unproductive uses.
Safety, Purpose, and Liquidity in Lending

Safety of Funds Purpose of Loan Liquidity and Repayment

Bankers must ensure loans are Loans should be for clear, Repayment sources and methods
safe throughout their tenure, productive purposes. Speculation must be clear. Security should be
repaid with interest, and used for or liquidation of prior borrowings is realizable and loans liquid to
productive purposes in trade, discouraged. Banks support enable recycling of funds. Term
industry, or agriculture. Experience financing for agriculture, small loans should match deposit
teaches caution and tact in industries, and employment maturities to avoid asset-liability
lending. generation. mismatches.
Security in Lending
Types of Security
Security can be personal (borrower’s liability) or tangible
(assets like shares or land). It may be primary (main cover)
or collateral (additional cover).

Characteristics of Security
• Marketability: Security should have a ready market.
• Clear Title: Ownership must be verified and undisputed.
• Stability: Value should not fluctuate wildly.
• Storability: Should be easy to store safely.
• Transferability: Both physical and legal transfer should be
feasible.
• Yield: Some securities generate income.
• Durability: Should not perish during loan period.
 Profitability and Risk Management

Profitability Risk Management

Banks must earn reasonable profits after covering Lending involves calculated risks. Diversification across
expenses and provisions. Interest rates vary by credit borrowers, industries, and securities helps mitigate
rating and security type. Profitability is crucial in a risk. Branch networks provide varied security portfolios
competitive, liberalized market. to avoid simultaneous defaults.
National Interest and
Credit Exposure Norms
National Interest
Loans must align with national interests. RBI may restrict
advances against certain commodities. Banks must focus on
market share, profitability, and portfolio diversification amid
liberalization.

Credit Exposure Norms

Banks must follow NABARD norms on credit exposure limits
for individuals, units, and sectors. Monitoring arrangements
ensure compliance with these exposure limits.
Fair Lending Practices Code (FLPC)
Customer Service
FLPC ensures courteous, speedy service for retail loans up to Rs 2 lakhs, including clear information on
products, terms, and charges.

Transparency
Branches must acknowledge applications, inform customers of additional requirements, and provide
reasons for loan rejections.

Grievance Redressal
Customers can raise grievances, which branch managers address promptly. If unresolved, higher
authorities intervene within a specified timeframe.
 Bank's Loan Policy
Policy Framework
Formulated by Head Office, the policy aims for a well-
structured loan portfolio, focusing on advances, asset
monitoring, and NPA recovery.

Key Influences
• RBI Monetary and Credit Policy
• Risk Management emphasis
• Bank’s profit strategy
• Industry analysis and market forces
• Social lending targets
 Syndicate Bank v. Jaishree Industries (2005)

Facts: The bank granted a loan to a business entity without properly

assessing its creditworthiness or securing adequate collateral. The
borrower defaulted soon after, and recovery became difficult.
Issue: Whether the bank had followed appropriate procedures in
sanctioning the loan.
Held: The court criticized the bank for not performing due diligence and
failing to follow its own guidelines. It observed that banks have a fiduciary
duty when dealing with public money and must follow risk assessment
practices.
Principle: Due diligence is essential before disbursing loans. Banks are
expected to act prudently and protect public deposits.
Relevance to Lending: Reinforces the need for background checks, risk
evaluation, and adherence to lending norms.
CREDIT POLICY
Understanding Bank Credit Policy
The Credit Policy, also known as the
Loan Policy, guides a bank's approach
to lending, balancing customer service,
risk management, and profitability. It
covers all credit activities, including
various loan types like cash credit,
overdraft, term loans, and guarantees.
The bank's Board typically formulates
this policy, ensuring compliance with
regulatory standards and internal risk
profiles.
This policy aims for steady credit
growth, quality asset management, and
ethical business practices. It includes
guidelines on customer acceptance,
know your customer (KYC), and lending
Credit Policy Framework and
Governance
Credit Policy is a formal, Board-approved document defining risk limits and
procedures. It ensures loan officers operate within set risk tolerances, with
clear protocols for exceptions requiring higher approvals. The policy details
credit function organization, authorities, and responsibilities.

Periodic updates are essential to reflect new products, regulatory changes,

and operational realities. For foreign branches, local laws are incorporated
separately. Banks establish a Credit Policy Committee led by senior
executives to oversee credit risk management and policy formulation.

Credit Policy Committee

Includes heads of Credit, Treasury, Risk Management, and Chief Economist.

Credit Risk Management Department

Monitors compliance, loan quality, and portfolio risk, independent of
credit administration.
Key Contents of a Credit Policy
A comprehensive Credit Policy includes the purpose, objectives, lending
authorities, and controlling authorities. It defines credit denial procedures,
portfolio composition, and diversification limits to manage sectoral and
geographic risks.
The policy also covers types of loans, appraisal standards, and documentation
responsibilities. It ensures loans are sanctioned with due diligence,
maintaining asset quality and profitability while adhering to regulatory norms.

Objectives Lending Authority

Maintain asset quality, growth, Defines sanction powers at
risk-adjusted returns, and market various organizational levels.
share.

Portfolio Management
Specifies credit concentration and diversification limits.
Appraisal Standards: Qualitative and Quantitative
Credit appraisal involves qualitative and quantitative assessments. Qualitative factors include market conditions,
competitor policies, and RBI guidelines. Exposure limits are set for counterparties and sectors, with discretionary
powers defined for credit sanctions.

Quantitative parameters focus on liquidity ratios, financial soundness, turnover trends, profitability, credit ratings,
and capital market perception. These ensure credit decisions align with the borrower’s financial health and market
realities.

Qualitative Factors Quantitative Factors

• Exposure limits by sector • Liquidity and financial ratios

• Market and competitor analysis • Turnover and profit trends
• Discretionary sanction powers • Credit and market ratings
Working Capital and Term
Loans Assessment
Working capital credit is assessed based on liquidity, financial soundness,
turnover, profits, and credit ratings. The policy specifies acceptable ratio
levels and procedures for deviations, ensuring appropriate financing
aligned with business needs.
Term loans require evaluation of technical feasibility, promoter
contributions, and commercial viability parameters such as debt service
coverage and asset coverage ratios. External expert vetting is mandated
for larger projects to ensure sound investment decisions.

Working Capital
Liquidity, profitability, turnover, and credit rating assessments.

Term Loans
Technical feasibility, promoter equity, and financial ratios.
Specialized Lending and Credit Facilities
Lending to Non-Banking Financial Companies (NBFCs) requires distinct credit assessment due to their unique
business models. Infrastructure financing is critical, with dedicated divisions managing large-scale projects like
power, roads, and telecommunication.

The policy also governs lease finance, letters of credit, guarantees, syndication of loans, and hedging of forex risks.
Emphasis is placed on genuine commercial transactions and compliance with RBI guidelines.

NBFC Lending Infrastructure Finance Trade & Risk Facilities

Specialized credit assessment Dedicated project finance divisions Letters of Credit, guarantees,
reflecting NBFC business models. for national development projects. syndication, and forex hedging
policies.
Risk Management and Fair Practices
The Credit Policy incorporates a Risk Policy defining acceptable risk levels and measurement tools. It emphasizes transparent
and fair practices in loan processing, appraisal, sanction, and recovery, aligning with RBI’s Fair Practices Code.

Documentation responsibilities, waiver authorities, and loan file maintenance are clearly outlined to ensure compliance and
accountability. The policy mandates regular portfolio reviews and loan grading linked to pricing and risk assessment.

Risk Policy
1 Defines risk tolerance and measurement approaches.

Fair Practices
2 Ensures transparency and fairness in lending processes.

Documentation & Review

3 Mandates proper loan documentation and periodic
portfolio evaluation.
Loan Loss Provisioning and Review
Policies
The policy sets standards for loan loss provisions, income recognition, and asset classification,
following RBI guidelines. Banks must maintain board-approved provisions for standard assets
above regulatory minimums, based on sector risk evaluations.

Quarterly reviews assess sector performance and emerging risks, enabling proactive
provisioning. Loan review and renewal policies ensure timely reassessment of credit facilities,
incorporating regulatory instructions and managing delays in financial statement submissions.

15 4
Months Quarterly Reviews
Validity period for external credit ratings Frequency of sector risk and portfolio
performance evaluations

100%
Provision Coverage
Board-approved provisions above regulatory
minimums
THANK YOU